Another Defense Stock Bites the Dust

On a miserable day for the market, shares of Oshkosh (NYS: OSK) fared worse than most. Thank the investigative journalists and professional number crunchers at TheWall Street Journal, who yesterday took the truckmaker to task for bidding too low on a major military contract.

Two years ago, Oshkosh investors thrilled to the news that their company had beaten the big boys again. Fresh from an upset victory over Navistar (NYS: NAV) , Force Protection, and General Dynamics (NYS: GD) in the contest to build "all-terrain" MRAP armored cars for the Pentagon, Oshkosh had notched another victory. It had been chosen to build a new family of medium tactical vehicles (FMTV) -- a contract that, if all went well, could be worth $3 billion over five years. Investors roared their approval, hoping Oshkosh might eventually compete with the big defense players like General Dynamics among others. But according to the Journal, they may have spoken too soon.

A bid too lowWinning FMTV, you see, required Oshkosh to beat its competitors on price. The company did underbid incumbent military truckbuilder BAE by 30%. But just as we saw with Boeing (NYS: BA) back in June, aggressive bids to win business sometimes backfire. In Boeing's case, analysts worried that the airplane builder had cut its profit margin "to the bone" to win the right to build refueling tankers for the Air Force. As it turned out, that was too optimistic -- Boeing has confirmed that it's actually losing money on the planes.

Likewise, it seems a bid originally designed to win Oshkosh only "less profit" than BAE had been making will actually turn into a money-loser. Oshkosh recently warned that it'll probably have to take a charge against earnings for the losses it's racking up on FMTV. On the one hand, the truck's costing more to build than anticipated. On the other, a suddenly skimpy Pentagon is declining to pay extra for upgraded options that Oshkosh had hoped to hawk.

Bad news and worse newsThe net result of all this is negative profit margins on the $3 billion contract for Oshkosh -- and it gets worse. Today, Oshkosh is only halfway through its five-year project. Far from boosting Oshkosh's bottom line, FMTV could remain a drag on its profits for years to come.

At the time this
article was published Fool contributorRich Smithdoes not own (or short) shares of any company named above. The Motley Fool owns shares of Oshkosh and General Dynamics. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.